Tom Kelly: Long-term, fixed-rate loans are not the only option

If your adjustable rate mortgage is about to adjust from its initial rate and term and you definitely want to stay in your home for an extended period of time, there are more questions to explore before leaping into the obvious option – a long-term, fixed-rate loan.

Many homeowners are in this situation right now. It’s a good idea to visit with a competent mortgage account executive and work with that person to find the right option for what you want to achieve. There are many misperceptions about various mortgage products. Your plans for the property and the payment amount you are comfortable with are primary factors.

Even though mortgage interest rates have been on the uptick, there is no long-term sign that rates will absolutely continue to rise. Remember, you are seeking the best rate while you remain in your home – and very few people stay put for 30 years.

Homeowners should make a decision to recalibrate their mortgage based on the next chapter of their lives. Some lenders say it’s wise for customers to evaluate their options by looking at the month-to-month and total costs over the next 24 months. That helps compare the costs of the refinance.

For example, let’s say you had a $150 monthly savings between your present mortgage amount and the new amount after your ARM has adjusted. Then, take the estimated total amount of a new origination fee, appraisal, title insurance and other costs. Let’s say that amount is $3,000. Divide that amount by $150 to determine how many months it would take (20 months) to simply repay the loan costs of the new loan. Weigh that result with the savings from your potential new payment of your lower refinanced interest rate and payment.

The refinance costs in this example show that a refinance should be worthwhile – if only the principal and interest payment are considered. Everyone’s need for monthly income is different. Many customers are looking to minimize their out-of-pocket expense. Some will choose slightly higher rates to offset closing costs, and for some that can make sense.

For those who may remain in the home for a short period of time and want to actively manage their cash flow, an interest-only loan might be a good option. (These products are not for those looking to buy more house than they can afford or have a difficult time managing important expenses and finances.)

While some mortgage analysts say it’s beneficial – both financially and emotionally – to pay off the roof over your head as quickly as possible, the need to have extra money on hand for emergencies, college educations or parental health care often takes priority over paying down the mortgage. Typically, midrange, five- or seven-year ARMs carry lower monthly payments than long-term, fixed-rate loans, thus freeing up cash that would be earmarked for the monthly mortgage payment.

Most ARMs carry monthly or annual caps and lifetime caps, so it is important to take a look at the current adjustable rate mortgage and determine what impact you will see when the rate begins to adjust.

There are some key considerations for homeowners whose short-term (one to three years) or midterm (five to seven years) adjustable rate mortgage is about to move. First, review the terms of the current mortgage and the need for making a change. Consider another ARM, especially if you will only remain in the home for a short time. Or, if you will remain in the home for several years, it may be beneficial to refinance into a fixed-rate mortgage. Some borrowers, especially older homeowners, prefer the reliability of a constant, fixed-rate plan.

Remember, even if you think you know what product you want, it is best to discuss needs and options with a lender. There are programs available that did not exist in the mortgage world five short years ago. One of them could target your exact needs, but you’ll never know about it unless you ask.

And, be wary of someone who recommends a specific course of action without discussing your situation and needs. No two borrowers are exactly alike.